State Budgets

South Dakota’s Secret to Success

During her State of the State address, South Dakota Governor Kristi Noem proudly rejected additional unemployment aid from the federal government – and rightfully so. With an unemployment trust fund balance of nearly $160 million and an unemployment rate of 3% (tied for the lowest of any state), The Mount Rushmore State does not need more federal aid.

As other state economies stumble through the pandemic and explore bankruptcy, how did South Dakota become the most fiscally stable state in the nation?

For decades, South Dakota lawmakers have practiced fiscal discipline.  South Dakota has no outstanding general obligation bonds, for example. South Dakota also has the lowest unfunded pension liabilities of any state.

South Dakota also outperforms other states in funding its Other Post-Employment Benefits (OPEB) – like Medigap and dental plans – for state government retirees. Remarkably, South Dakota has no unfunded OPEB liabilities. By reforming state OPEB plans to toward a defined-contribution plan, South Dakota has helped to secure a stable retirement for public employees.

Lawmakers in states with gargantuan debt problems, like Illinois and New Jersey, expect to pull state finances above water by raising taxes, especially on job creators. However, South Dakota achieved their extraordinary fiscal position without collecting any personal or corporate income taxes. South Dakota also does not levy any death taxes on estates or inheritances. In fact, South Dakota state tax collections are the seventh lowest of any state, amounting to only $2,193 per capita.

No income or death taxes give South Dakota one of the most competitive state economies in the country. According to Rich States, Poor States: The ALEC-Laffer State Economic Competitiveness Index, South Dakota’s low-tax policy environment ranks 13th most competitive of any state.

It is worth mention that South Dakota ranked as the 2nd most competitive state as recently as the 2014 edition of Rich States, Poor States. But, increases to the state minimum wage passed by voter referendum in 2014 and local increases to property tax rates during the late 2010s have caused South Dakota to begin falling behind other states in economic outlook. Despite this, no state income tax, no death taxes and a commitment to the right-to-work still position South Dakota to benefit greatly from future economic growth.

For South Dakota, a competitive state economy has dealt dividends in encouraging new investment and job creation. Over the past decade, South Dakota’s economy has grown by over 41%, and employment has grown by nearly 8%. A state economy outperforming most states speaks to the competitive economic environment cultivated by South Dakota lawmakers.

Because South Dakota began 2020 in such a stellar financial position, COVID-19 aid has been directed at businesses and workers struggling through the pandemic. Rather than using CARES Act dollars to paper over budget deficits, Gov. Noem’s administration created a program where businesses with certain criteria can apply for a state grant. Out of $1.25 billion in available CARES Act funds, Gov. Noem made $400 million available to entrepreneurs trying to remain in business. If South Dakota had massive state debt and spending problems, the state would have had to prioritize other obligations and similar direct aid to businesses would not have been possible.

When the COVID-19 crisis struck, South Dakota was well prepared while other states went to the federal government with outstretched hands. South Dakota was able to reject more money from the federal government, because of their secret to economic success. Leaving money in the hands of families and job creators by keeping taxes low builds a foundation of strong state economic growth. State lawmakers spending within their means to keep debt limited also ensures resources are available to prepare for unexpected events. And when crisis arose, decades of fiscal pragmatism allowed South Dakota to direct CARES Act funding directly to job creators and workers. If state lawmakers follow South Dakota’s secret to success, they, too, can be prepared for any crisis.

In Depth: State Budgets

Smart budgeting is vital to a state’s financial health. The ALEC State Budget Reform Toolkit offers more than 20 policy ideas for addressing today’s shortfalls in a forthright manner, without resorting to budget gimmicks or damaging tax increases. One way to stabilize budgets over time is to embrace…

+ State Budgets In Depth